What is a Cash Cushion? A Cash Cushion is a reserve of cash or cash-equivalents held outside your invested portfolio, sized to cover one to three years of living expenses, so a retiree can fund spending without selling stocks during a market downturn. It is the retirement-phase counterpart to an Emergency Fund, built specifically to protect against Sequence of Returns Risk in the first years after leaving work.
Worked example: annual expenses of $40,000 and a two-year cash cushion means holding $80,000 in a high-yield savings account or short-term treasuries, separate from your $1,000,000 invested portfolio. If the market drops 30% in year one of retirement, you draw from the cushion instead of selling depressed stocks, then refill the cushion by selling from the portfolio once prices recover.
| Cushion size | Covers | Best for |
|---|---|---|
| 6 months | Short gaps | Stable income, low sequence risk |
| 1 year | One bad year | Most retirees |
| 2-3 years | A recession | Early retirees with 40+ year horizons |
The tradeoff is opportunity cost: cash sitting idle earns less than a diversified portfolio over time, so an oversized cushion drags down long-term returns. Most FIRE practitioners rebuild the cushion opportunistically, selling appreciated assets in strong years rather than on a fixed schedule.